• Saturday, July 13, 2024
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BusinessDay

Drowning in debt? Don’t make this credit card mistake

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People who find themselves in credit card debt may take serious measures to prevent balances from creeping higher. Often this includes transferring large balances from older, high interest credit cards to a brand new credit card with a 0 percent or very low introductory interest rate.

To remove the possibility of ever using the original card with the big, bad interest rate, one may make the mistake of closing down the higher interest credit card(s) and just sticking with the new card.

While shifting the debt load to save interest is often a wise decision (provided you actually have a plan to pay off the majority of the balance within the introductory period), closing the original card is not. Here’s why:

Credit history

Even if it’s bad history, you don’t want to make it disappear. If you held a job for 10 years, even if you got fired, the work experience is relevant and valuable on your resume. You wouldn’t want to remove it from your resume, it could hurt your eligibility or attractiveness for future jobs.

Same goes for credit accounts – even if they have stains on the record, the record is still valuable.

Debt to credit ratio

Older accounts often have higher credit limits than new cards. Credit lenders will look at your debt:credit ratio (% of your total credit you are using) to assess your risk and what interest rate they should charge you. Closing an old account with a high limit can have a dramatic impact on your debt:credit ratio.

Leave your credit account open

Instead of closing your credit card account, leave it open, and cut up your credit card. Don’t use the new card until it’s fully paid down, and stay motivated on frugal living and debt freedom.